No data caps, no DOCSIS 3.0? TWC’s math doesn’t add up

Time Warner Cable suggests that DOCSIS 3.

According to Time Warner Cable's most recent annual report, the company has largely rolled out DOCSIS 2.0 across its hybrid fiber-coax network and "plans to deploy DOCSIS 3.0 selectively in its systems during 2009, which will enable TWC to deliver speeds significantly faster than currently achievable." But will it?

Alex Dudley, the company's vice president of public relations, has been tweeting like a madman recently, most of his tweets naturally concerning the data cap issue. When Stacey Higginbotham of GigaOm asked Dudley if the DOCSIS 3.0 rollouts were going ahead apart from the data cap trials, the response was surprisingly pointed—"it was scheduled as part of cbb [consumption-based billing] trial, but we all know how you feel about that." Ooh, snarktastic!

(Also, it's not the shrewdest thing a top PR man could say about an issue that has, over the last few weeks, attracted the attention of the grassroots, the press, the city of Rochester, and members of both houses of Congress. One thinks of disgraced Illinois governor Rod Blagojevich, who asked the court for permission to jet off to Costa Rica so that he could take part in a reality show called I'm a Celebrity, Get Me Out of Here!. The judge overseeing the case said, "I don't think this defendant in all honesty... fully understands the position he finds himself in.")

So is TWC threatening to take its DOCSIS 3.0 upgrades and go home without consumption-based billing? Who knows. In later messages, Dudley referenced his "flip but true" response and clarified a bit, saying that DOCSIS 3.0 hasn't necessarily been scrapped. The issue is "just that the rollout was scheduled with the trial and now all of it is on hold."

No DOCSIS 3.0 for now, then, while TWC comes up with some other deployment plan. He asserts over and over again that this is about money, and that the company needs more cash to upgrade its networks. When commentators pointed out that the company's broadband profits are going up even as expenses drop, the response was simply, "For now it is a very nice business... what we're saying is that we're seeing changes in it, and we want to make sure we keep up."

Luckily for TWC, one of the big expenses of "keeping up"—the actual DOCSIS 3.0 headend cards and new cable modems—are relatively cheap. We've seen estimates of $20-100 per customer, an easy expense to amortize, especially when pulling in "triple play" revenue (cable, phone, Internet) from subscribers.

TWC's main argument appears to be that, as bandwidth use rises, its costs go up—hence the fairness of consumption-based billing. But the DOCSIS 3.0 upgrades are generally fixed costs, and the internal TWC network is assuredly fiber optic already, so where do the extra fees come in? One obvious place to look is in TWC's connections to other networks, necessary to pass its customers' traffic along the Internet. Because of TWC's size, much of this traffic is likely to be peered with other large ISPs, costing the companies nothing (once the link is set up).

But TWC also pays "transit" costs to other networks with which it does not have peering arrangements, and these links do cost money. How much? The company's 2008 annual report appears to contain the answer. Page 83 has a chart showing TWC's contractual arrangements for 2009, and what the chart makes clear is just how little the company pays for bandwidth.

"Programming purchases," which makes up the bulk of the contracted expenses, refers to cable TV programming. Although TWC had to build an entire infrastructure to make cable TV work, pay these massive yearly fees for content, hire technicians, and do truck rolls, it still makes money on cable service.

With that infrastructure in place, offering data services like VoIP and Internet access is relatively cheap. And both are getting cheaper—as the company says in its annual report, "High-speed data costs decreased primarily due to a decrease in per-subscriber connectivity costs, partially offset by growth in subscribers and usage per subscriber." VoIP costs for TWC's digital phone service dropped (per person) due to a "decline in per-subscriber connectivity costs due to volume discounts received in 2008."

When we look at the breakdown on the chart, TWC Internet bandwidth contracts in 2009 are actually 10 times less than those for its digital phone service, and are one of the smallest expenses on the chart.

TWC keeps saying that it needs to do a better job educating customers about the need for the new billing system, and that educational initiative appears to have begun with advocacy by faux consumer groups. Not an auspicious start.

TWC officials have been reluctant to speak plainly with the press, content to keep asserting huge future expenses and uncontrollable costs. But the company's own numbers show that broadband costs are dropping even as traffic surges 40-50 percent a year. Internet bandwidth costs are miniscule. DOCSIS 3.0 upgrades are cheap.